Your LLC and Spring Cleaning: Which Records to Keep or Toss?
Spring is a great time for cleaning out old files, clearing space, and making way for new projects. Before you put on Bob Seger and “take those old records off the shelf,” be sure to review your company’s record retention policy. Your business doesn’t have a record retention policy, you say? It’s never too soon to put one in place.
Adopting a “kitchen sink” policy of saving everything is simple, but it has serious pitfalls, including future lawsuits and storage costs. In an unexpected legal action, a court could require you to sort through ANY and ALL of your current information – no matter how voluminous – to provide certain items. For the kitchen-sinkers among us, this can be a costly and overwhelming drain on resources. Also, at that point, serious penalties could apply for failing to provide information if you have it or for destroying or discarding information. These include paying monetary sanctions, losing the lawsuit, or even serving time in jail.
As the popular expression says, when someone is under arrest, “anything you SAY can be used against you in a court of law.” In the world of business records management, this could be thought of as “anything you SAVE can be used against you in a court of law.”
Even if you are fortunate enough to never be involved in a lawsuit, sporadic cleaning and record destruction has other risks. A governmental auditor, or even the media, might subsequently perceive an innocent office cleaning as an effort to hide or destroy purportedly damaging information. On the other hand, routine record destruction, done pursuant to company policy, is likely viewed as just that: routine.
In the long run, establishing a sound records management policy is a better approach. A records management program provides you and your employees a roadmap for keeping necessary records and discarding unnecessary information. A good record retention schedule will list what information to keep, how long to keep it, and, importantly, when to destroy it. For sensitive information, it might also state how to preserve the records and how to destroy them when the time comes.
Why Retain Records?
Certain types of information must kept for minimum periods of time. There are two key reasons for this: business and legal. For example, keeping good records helps monitor and assess progress. Also, while preforming a three-year contract, you may need to review it every now and then to refresh your memory.
A variety of federal and state laws require certain records to be kept for minimum periods of time. Some types of records, such as employment records and accounting records, must generally be kept by all businesses. In some cases, you may need your retained records to defend your business in case you are ever audited or sued.
If you operate your business as an LLC, keep in mind that you may have to comply with recordkeeping requirements similar to those for corporations. Although LLCs generally offer more flexibility than corporations, many states still impose recordkeeping requirements on LLCs. The types of information a state may require an LLC to keep include:
- Member lists, including full names and addresses
- Articles of organization and amendments
- Operating agreement and amendments
- Contribution information
- Financial information and copies of federal, state, and local tax returns
The precise requirements vary by state, so be sure to check with your advisor. Also, many states require that records kept be made available to other members for inspection.
Also, depending on your industry, various other laws may require your business to keep certain information. For example, a biofuels manufacturer and a clothing retailer would likely be subject to the rules of different government agencies, each imposing different recordkeeping rules. Often, a business is subject to multiple laws, each imposing various minimum retention periods, such as 1 year, 4 years, 10 years, etc. Some information may have to be retained indefinitely. The result? There is no “one size fits all” policy suitable for all businesses.
Things to Look For in a Record Retention Policy
Although information retention programs are generally company-specific, some aspects are common to just about any records management policy. Here are some things to consider in evaluating your own policy:
- Is the program an ongoing process? The information retention program should be a consistent part of routine business operations
- Is there a records inventory? The various records made by all in the company, in various formats and media, should be identified in a records inventory
When reviewing or adopting a record retention program, consider hiring a consultant or records management service. Their expertise could help tailor your program to what is best for your business.
- Which are the official records? In our electronic world, the same record may exist in multiple locations and there is usually more than one version of a record. The policy should address which versions to retain
- Are records inventoried and organized? The records should fit into subcategories, allowing for different retention decisions for different types of information. The policy should include indexing and organizing in a manner that facilitates timely record retrieval if necessary
- Are records accessible? The policy should allow for easy and adequate access to retained information, despite any changes in media format (remember the floppy disc?)
- Does the policy have a “hold” feature? The policy should include audit, litigation and similar “holds.” A hold feature serves to override routine policy in order to preserve needed information that would otherwise be destroyed. This feature comes into play if there is a governmental inquiry or audit, a legal action, or a similar event
- Is the retention program periodically reviewed and updated? The various laws, contractual obligations, and business considerations that dictate minimum retention periods can change over time. A periodic policy review should evaluate whether the program is still up-to-date and whether it is being consistently implemented as part of routine business operations
Consult your attorney regarding applicable legal retention requirements.
A good information retention program should help your business run smoothly and avoid unnecessary risks. Also, it will hopefully allow you to quickly adapt to changes in your industry, while freeing up some time to reminisce about the days of old.